Rafol, Rietzhel B.

Yumang, Jasmin A.

On March 31, 2015, Malago Co. issued 50,000 shares with a book value of P5
each for 80% of Bessy Co.s net assets. Malago Co.s shares were currently
trading during that time at P8 each. Malago Co. would give another P150,000
if Bessy Co would earn a net income that is more than 70,000 for the next
three years. The probability that Bessy Co would achieve this is only 60%.

Balance sheet data for the two companies prior to 2015 combination are as
follows:
Malago
Co.
Cash
Accounts Receivable
Inventory
Land
Building
Equipment
Total Assets
Current Liabilities

140,000
167, 000
374,000

Book
Value
52,500
61, 450
110,000

425,000

75,550

250, 000

210,500

78, 000

180,000

1,434,000

690,000

184,000

315,000

150,000

500,000
750,000
1,434,000

100,000
125,000
690,000

Non-Current Liabilities
Common Stock
Retained Earnings
Total Liabilities and Equity

Bessy Co.
Fair
Value
52,500
56,000
175,00
0
210,00
0
240,00
0
160,00
0

312,00
0
155,50
0

*Bessy Cos building and equipment has remaining a useful life of 5 years
and 8 years respectively. The inventory is measured at FIFO.
Subsequent after the combination the company had the following:
Net Income

Malago Co.

Bessy Co.

2015
2016

225,000
220,000

160,000
115,000

Dividends Paid
2015
2016

Malago Co.
35,000
20,000

Bessy Co.
10,000
15,000

For 2015

Bessy Co. bought a machinery on June 31, 2015 for 175,000 and later
sold it to Malago Co for 250,000. The machinery has useful life of 10
from date of purchase.
Bessy Co. sold inventory for 80,000 to Malago Co with a cost of 60,000
on September 1, 2015.
Bessy Co. bought inventory from Malago Co. for 120,000 which had a
cost of 75,000 on October 1, 2015
At year end, remaining inventory from September purchases and
October purchases is 30,000 and 45,000 respectively.
Goodwill is discovered to be impaired for 14,500.

For 2016

On April 31, 2016 Malago Co. sold the equipment acquired from date of
acquisition for 180,000.
Malago Co. bought inventory for 85,000 from Bessy Co at a gross profit
rate of 25% on May 1, 2016
Malago Co sold inventory costing 140,000 for 280,000 to Bessy Co on
November 31, 2016
The company sold all inventory from September 2015 sales and had a
remaining ending inventory of 15,000 from October 2015 sales.
Ending inventory from May sales are 42,000 and inventory from
November sales is 110,000.

Requirements:
1.
2.
3.
4.
5.

Compute
Compute
Compute
Compute
Compute

for total goodwill on the date of acquisition.

for the Combined Net Income for December 2015.
for the Combined Net Income for December 2016.
Malago Cos adjusted retained earnings balance for 2015.
Malago Cos adjusted retained earnings balance for 2016.

ANSWERS:
1) Goodwill on the date of acquisition.
Parent
FVB
FVINA
Goodwill(Gain)

NCI
490,000
340,800
149,200

Parent
FVB
BVB
Amortization
excess

NCI
340,800

of

TOTAL
122,500
85,200
37,300

612,500
426,000
186,500

TOTAL
85,200

426,000
225,000
201,000

2) Combined Net Income for December 2015.

Parent
Parent Net Income
Dividends Share from
Sub
Parents
Own
Net
Income
Unrealized Gross Profit
Realized Gross Profit
Parents adjusted Net
Income
Subs Net Income
Unrealize
GainMachinery
Realized Gain
Unrealized Gross Profit
Realized Gross Profit
Amort of Excess (Bldg)
Defficient
FV
(Equipment)
Amort of Goodwill
TOTAL

225,000
(25,000)

NCI

Conso
225,000
(25,000)

200,000

200,000

(45,000)
28,125
183,125

(45,000)
28,125
183,125

96,000
(60,000)

24,000
(15,000)

120,000
(75,000)

4,500
(16,000)
10,000
(3,540)
1,500

1,125
(4,000)
2,500
(885)
375

5,625
(20,000)
12,500
(4,425)
1,875

(11,600)
203,985

(2,900)
5,215

(14,500)
209,200

Combined Net Income for December 2016

Parent Net Income
Dividends Share from
Sub
Parents Own Net Income
Unrealized Gain
Realized Gain
Realized Gross Profit2015 sales
Parents adjusted Net
Income
Subs Net Income

Parent
120,000
(10,000)

NCI

Conso
120,000
(10,000)

110,000
(140,000)
85,000
7,500

110,000
(140,000)
85,000
7,5000

62,500

62,500

92,000

23,000

115,000

3)

Realized Gross Profit2015 sales

Unrealized Gross Profit
Realized Gross Profit
Amort of Excess (Bldg)
Sold
Defficient
(Equipment)
TOTAL

FV

9,000

2,250

11,250

(17,000)
8,600

(4,250)
2,150
(1,180)

(21,250)
10,750
(5,900)

3,625

18,125

25,595

190,475

(4,720
14,500
164,880

4) Malago Cos adjusted retained earnings balance for 2015

Retained Earnings, 2015
Consolidated Net Income
Dividends Declared
Consolidated Retained Earnings, Dec
2015

750,000
203,985
(35,000)
918,985

5) Malago Cos adjusted retained earnings balance for 2016

Conso Retained Earnings, Dec 2015
Consolidated Net Income
Dividends Declared
Consolidated Retained Earnings, Dec
20156

928, 985
164,880
(20,000)
744,105